What You Need to Know
- CPA Sheryl Rowling, who heads rebalancing solutions for Morningstar, offers some pointers.
- Consider moving up future big multimillion-dollar sales into this year.
- Structure future deals as installments to keep annual income under $1 million.
What if the Biden administration’s proposal to raise the capital gains tax on high-income taxpayers was retroactive to April 28, the day it was proposed as part of the American Families Plan, or to May 28, the date the Treasury Department released the administration’s proposed fiscal 2022 federal budget?
Either is possible since the Treasury Department noted in the budget, aka the “Green Book,” that its proposal on capital gains “would be effective for gains required to be recognized after the date of announcement,” which could refer to April 28 or May 28.
Jeffrey Levine, chief planning officer at Buckingham Strategic Wealth, wrote in Forbes recently that although “it’s clear that the Administration has its sights set on retroactively increasing the capital gains rate … [but] it’s highly unlikely that the proposed capital gains changes will be enacted retroactively” by Congress, which will ultimately decide the issue.
Levine explained that such a change is not very politically feasible to undertake in the third quarter, when more than half the year has passed.
CPA Sheryl Rowling, who heads rebalancing solutions for Morningstar, isn’t so sure. “It is true that we don’t know what will make it into law,” wrote Rowling in a recent Morningstar column. “However, the fine print of what has already been proposed could mean when it comes to capital gains taxes, the effective date after which these increases would be in force has already been passed.”
Biden’s Capital Gains Tax Plan
Under the Biden plan, capital gains for those earning more than $1 million would be taxed at their marginal tax rate, which is currently 37% and which the administration hopes to increase to 39.6% in 2022. Those taxpayers would also have to continue paying the 3.8% Medicare surtax on capital gains, bringing the total levy to 40.4% in 2021 and 43.4% in 2022.
The key to avoiding the higher capital gains tax is to keep income below $1 million, writes Rowling. Then she offers several scenarios for advisors and others to consider to help high-income clients plan for the possibility of higher capital gains taxes applied retroactively. She stresses that any pre-emptive moves should not inflict harm if the tax hike doesn’t pass, which is also a possibility.
The scenarios assume that the higher capital gains tax is retroactive to late April or late May 2021. They involve a hypothetical client who earns more than $1 million and would thus be subject to the higher capital gains if he or she sold a business for $10 million in 2021, anticipates such a move in the future or was collecting installment payments from a 2020 sale.